My state Louisiana is reportedly taking them to court for operating as an unregulated bank. I remember seeing it in the news but have not heard anything further. I think other states have taken legal action as well.
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PayPal has FDIC insurance on your cash balance, even though FDIC does not think they are a bank. They merged with X.COM a couple years ago. X.COM was a real bank, so the money must be held there. New York banking regulators have aleady ruled that PayPal is not operating an illegal bank. The dangers of being a new format I guess. See this article:
I wouldn't describe them as a new format, but maybe as a virtual variation on traveler's checks. Paypal, which I use and find convenient, is one of those entities whose main profitability will prove to be for those who got in on the ipo. In the meantime, they make some money from some transactions, and from interest on your deposits, but without the great scale of a major credit card company. Add all this up - and bear in mind the problem of offering FDIC insurance while denying they function as a bank - and you will know to keep only as much on deposit as you can afford to have tied up for awhile if there's a meltdown, a la Martha Stewart, et. al.
Since I have moved from Germany to the US, one difference in banking customs has always made me wonder and nobody was able to explain the reason behind it.
All bank transactions, loan payments or payments for goods purchased at Ebay i.e. are paid in Germany by direct deposit.
You give your bank account number and bank ID number and the money is being transferred from one bank account to another within 24 hours and it will cost you around 50 cents.
Rent payments, doctor or car bills,insurance payment, everything is being paid like that. Before I came to the US, I have never heard of money orders or such and find the use of MO extremely inconvenient.
I.E. last time I went to my post office,in order to cash a money order, they did not have enough cash, so I had to return another day, or the money orders are limited to a maximum amount of, I believe, $700, so if you have to make a higher payment, you need to buy a few MO, which is costly. Compared to direct deposit, this is quite a hassle.
Please do not get me wrong, I do not want to suggest the Germans have found the stone of wisdom when it comes to money transfers, but I really wonder, why the American customer would put up with such a difficult system to transfer money, when direct deposit has basically worked not only in Germany for over 30 years now.
Anybody knows what the reason behind this is? Since direct deposit is not popular here in the US, I guess that this is the reason why a company like Paypal could come into existence, but when looking at their legal trouble (although I must say that I have been a member of Paypal for over 3 years and never had any problems) I wonder if a system like direct deposit, which is regulated by established banks, would not be more efficient and safer to use in the long run?